CEO Roundtable: Medical Marijuana

Springfield Business Journal Editor Eric Olson discusses the state’s new medical marijuana industry with Lyndall Fraker, director of Missouri Department of Health’s medical marijuana program; Desmond Morris, owner of The Wholesome Bud Co. LLC; Chip Sheppard, attorney with Carnahan, Evans, Cantwell & Brown PC and board member of New Approach Missouri; and Jamie Tillman, owner of Canna Bliss LLC.

Eric Olson: This is a brand new industry. In one word, how would you describe it?
Jamie Tillman: Exhausting.
Desmond Morris: Unprecedented.
Lyndall Fraker: Rodeo.
Chip Sheppard: Circus – except circus sounds a little out of control. I don’t mean it like that.
Olson: My thought was two words: Wild West.
Sheppard: Another word would be coattail. There’s no sense in recreating the wheel and ignoring other people’s mistakes. So, the department and the trade association and all the players that have been involved, I think, have done a good job of trying to learn from all the stumbles in all the other states.
Fraker: A lot of the structure and the foundation for our program was given to us by the drafters and then confirmed by the voters. In some ways, it made our job easier; in other ways, it made our job harder.

Unprecedented response
Olson: The number of applications the Department of Health and Senior Services has received show a lot of people want in on this game. North of 23,250 patient applications have been approved at this point. Is that more than anticipated?
Morris: I think it was probably more than what was anticipated by the (University of Missouri) study. The MU study anticipated around 25,000 by 2021. We’re well ahead of that. It’s going to follow the same sort of 1,000 people per week, in my opinion, until we get to whenever people do get awarded licenses. I think there’ll be a spike again. … We thought that there’d be around 700 (business) applications. There have been 2,100 applications.
Olson: The applications, is that for facilities, dispensaries, cultivators and testing?
Sheppard: Manufacturing, yes. The percentages, like that MU study – we all of course read it immediately. What he did not consider was, to me, some of the best evidence and that was Oklahoma. Five percent of the population has a medical card … in like 14 or 15 months. So, if Missouri even in two or three years has 5% of the population, we’re at 300,000 patients.

Budding industry
Olson: On the business operation side, the state will license 24 dispensaries, 60 cultivators and 86 infused product manufacturers in each congressional district. I think there’s one person in the room who can answer this one. What are the key qualifications in the license selection process?
Fraker: Let me clarify your facility numbers. It’s actually 192 dispensaries and that is defined as 24 per congressional district. So, there’s eight congressional districts. On the other facilities it’s 60 total, 86 total.
Sheppard: And they could be anywhere.
Olson: What are the total licenses that will be granted?
Fraker: 348. 340 was actually what the constitution mandated, but we decided early on to go ahead and license up to 10 testing facilities. There’s 10 categories of criteria that the applications have to be graded or scored by. One would be the character veracity, background, qualification, and qualifications and relevant experience of the principal officers or managers; No. 2 would be the business plan; No. 3, the site security; No. 4, experience in a legal cannabis market; No. 5, in the case of testing facilities, the experience of the personnel with testing marijuana, food or drugs; No. 6, the potential for positive economic impact; No. 7, in the case of medical marijuana cultivation facilities, the capacity or experience with agriculture, horticulture or health care; No. 8, for dispensary facilities, the capacity or experience with health care in the suitability of the location and its accessibility for patients; No. 9, in the case of medical marijuana-infused products manufacturing facilities, experience with food and beverage manufacturing; and then No. 10, maintaining competitiveness in the marijuana for medical use marketplace. Believe me, it was a task (to create these categories). When you have 2,269 applicants and you’re going to issue 340 licenses, you’ve got a one-sixth chance of getting a license. We’re going to get sued.

Waiting game
Olson: What’s the first date that you’ll have decisions on those scores?
Morris: Dec. 19 for testing, 26 for cultivation, Jan. 10 for manufacturing, Jan. 24 for dispensary and 31 for seed to sale.
Fraker: Now, testing, there were 17 applicants, and we’re going to issue 10. So that one will be fairly easy and that’s on the 19th. But then the cultivators, I think there were 540 applicants and we’re issuing 60.
Morris: The hardest thing for me, as a person who did do an application, is I have HVAC people calling me, trying to figure out how we’re going to do the HVAC. I have news publications contacting me asking how many people we’re going to hire. I have light vendors contacting me asking to set up contracts. Having to just navigate all those different processes has been really challenging.
Olson: You guys have to function as though you’re going to get a license without the full knowledge you’re going to get one.
Tillman: With all the expenses. We have to rent these buildings, infill. That’s going to throw a lot of people off on Dec. 31, because I’ve rented out some properties. Since it’s been extended, it’s going to cause a little bit of an issue. Most properties were leased out through Dec. 31 and then by that day they have to resign a five-year lease. Now, with us moving the date to Jan. 24, it’s going to cause some refiguring. You have leased places, right?
Morris: Yes. But we were able to work it out. Most people thought 150 days after August and nothing wrong with extending out a little bit longer, but you just have to be really flexible with everything.
Fraker: The drafters set these dates. Meeting those constitutional dates was very important to us.

All in
Olson: On the entrepreneurial side, what caused you guys to go all in on medical marijuana and this business opportunity? Marijuana Business Daily says both medical and recreational retail sales are on pace to reach $12 billion this year. They’re estimating a $48 billion economic impact. Is that the bottom line for you guys, or what’s really motivating your interest?
Tillman: It was just something I’ve always found intriguing. I said five years ago that I would have the first dispensary in Springfield, and I didn’t have any clue that it would be this fast. It’s just always been something I’ve been passionate about. I’ve seen how it’s helped people. My family member got diagnosed with a brain tumor, and it just put her out. And that’s when I discovered CBD and fell in love with that. I opened my business in September of last year and then, in November, medical marijuana was passed and for me it was kind of get on the bandwagon or get left behind.
Morris: I’ve believed in cannabis as a therapy for many years. I was in ninth grade and I had to write a speech. I wrote that cannabis shouldn’t be illegal, and that it’s silly that it’s illegal. My dad’s like, “Do you actually believe that?” And I lied to him, because I was scared of how he would react. I told him that I didn’t actually believe it. I really do believe that cannabis helps people. I’ve seen it. We can put together something that is not only going to have good economic impact, but it’s going to build up the community in a positive way. I’ve lived in Springfield since I was 11 years old. I’ve seen Springfield develop. I knew that I had to take the risk and get in. I want to have people see that it doesn’t matter how much money you come from or who we are, if you put the work in and if you believe in your ability, you can accomplish your goals. My goal is to have the cultivation, the manufacturing and the dispensary here in Springfield, all under one roof, where we’re able to develop a unique subset of products.

Seeing green
Olson: Tell me a little bit more about the risk that you’re having to take with this personally, professionally and financially. How much are you investing in this business model without a guaranteed return?
Tillman: Oh my gosh. For us, personally, we purchased a building just for our dispensary, so there’s $1 million right there, (plus) the people writing your applications, that runs anywhere from $20,000 to $100,000. … And I have a total of five. There’s the rent to keep the places occupied, lawyers and architects. It really added up very quickly.
Morris: For me, it was a risk worth taking all the way. We believe that we’re going to get it.
Olson: Where are you getting funding?
Tillman: I have two business partners that have funded me, and my dad owns most of our properties and he’s purchased them outright. So, we’ve been very blessed with that.
Morris: Friends and family, my personal savings. I’m sure as we get further in we’ll need some other sources to build it as big as I’d like to. I own a high-end car detailing business and some of our customers have committed. We haven’t taken any money from them, but they’ve done letters of intent.
Tillman: You’d be shocked how many people are willing to give you money. I get an offer every week of someone willing to give me money to put into this.
Sheppard: Usually with too many strings.
Tillman: I’m not even interested. I know how that works.
Sheppard: There’s funding out there with big private equity firms. They’ll do all the real estate improvements – it’s just where you spend the lion’s share of your money on a cultivation facility – but they want 14%, 16%, 18% interest and they want personal guarantees. What I think is the better way to do it is just get equity partners.
Morris: You still have to be really careful with that, because whenever you’re taking on an equity partner, it’s almost like you’re marrying them. I want to date for a long time before (I) get married.
Sheppard: That’s your “business prenup.” The minute Jamie and Desmond get their licenses, every percent of equity is going to be worth exponentially more than it’s worth right now.

What’s next?
Olson: In addition to the 33 states that have legalized medical marijuana, 11 plus Washington, D.C., have gone a step further and legalized recreational use. Some say that’s just the next step. Do you think that’s the case for Missouri?
Sheppard: There’s an initiative that’s been filed … so there is an effort in Missouri. No idea if it’ll be successful or not. During the (medical marijuana) campaign I stood up in front of Rotary clubs, as did everybody else on the campaign, and said we weren’t sure if Missouri would ever do that, or if they did, it would be four to six years. Unbeknownst to me, there were efforts last summer to do just that. The easy thing to do is to file that initiative. The hard thing to do is to decide to go gather signatures, to raise the money to go do it.
Fraker: What are the hurdles that the grassroots would struggle with?
Sheppard: On the medical marijuana deal, we gathered 40% of the signatures with volunteer petition signature gatherers. You had people, patients, all over the state gathering signatures – that’s free. Brad Bradshaw, for example, was paying $5 or $6 or $7 a signature at one point, and you had to have 140,000-something valid signatures, which meant you had to collect about 240,000 because 30%, 40% will be bad. It gets really expensive. We spent $1.8-$2.2 million gathering signatures. On the recreational side, you won’t have those patients passionate about that. They’ve already got their medicine, and they won’t buy recreational marijuana because it’ll be a lot more expensive. The tax rate under this new initiative is 15% plus your regular sales tax. So, the black market question comes up: Is that too high of a percent to where people just go back to the black market.
Morris: It seems like the ball is rolling downhill in that direction, not just with Missouri. We’re envisioning the United States within the next 10 years or so where it’s legalized federally and each individual state will be able to set their own recreational policy similar to how they do with alcohol.
Fraker: We certainly know that we need that banking bill that’s been passed through the House [of Representatives]. We need to be able to deal with banking regulations at a state level to keep everyone safe so we’re not carrying bags of cash.
Olson: That bill addresses the management of the income at these establishments, right?
Fraker: There’s just a real safety issue with bags of cash being carried around the state. I think most of our Missouri delegation understands that so hopefully we’ll see some movement with that bill.
Olson: What about pricing? Do you expect there to be fluctuations in pricing and products?
Morris: It’s going to, over time, commoditize. At the beginning, the price is going to be very high, and it’s going to go down very quickly. Whenever these businesses come on line, whenever it comes down to decide pricing, we’d be foolish if we didn’t look at the black market. What we found whenever we did our market study is that the price for the most successful companies tracks the price of the black market. You have got to incentivize them to come over to the legal side.
Sheppard: Which is why that 4% tax is important. A lot of states had an 8% or 10%. We wanted to have enough of a tax to fund something, but not so much of a tax that it looks like a sin tax.
Olson: What’s next? What will this program look like within the first few months after we get into January and all these licenses are issued?
Morris: If businesses start getting their cultivation licenses at the end of December, there’s going to be a very small subset of those cultivation license winners that have already infilled the facility. They’re going to be waiting for their commencement inspection. Hopefully, in January or February, they’d be able to start growing after that. It takes 90-ish days to grow. I anticipate the first product available by anyone to be early summer. That’s really ambitious. This first harvest for us would be September, October of 2020.
Tillman: Our Battlefield property will be built out for dispensary by the end of January. It would just be waiting for our cultivators to finish growing.
Olson: You would be buying 100% wholesale?
Tillman: Yes. I just applied for a dispensary license.
Sheppard: The testing facilities, they’ll have to buy a lot of expensive equipment. No one’s going to be able to get it sold until it passes a test. And so, you’ve got to go through the testing facility with every batch.

Excerpts from Features Editor Christine Temple, ctemple@sbj.net.